How to Cure Your Bad Money Habits
Many people struggle financially simply because they have their parents’ ideas about money.
Instead of creating assets that buy assets, most of our parents worked for money and then bought liabilities with that money, innocently thinking they were assets.
That is why many people go to school and get good jobs — because that’s what their parents did or advised them to do. Many struggle financially or live paycheck to paycheck because that’s what their parents did.
If a person truly wants to change, adopting a better idea is often a good idea. My rich dad always said, “If you want to get richer faster, simply look for ideas that are better than the ones you are using today.”
Three Things Holding You Back
I often hear people say, “When I make a lot of money, my money problems will be over.” In reality, new money problems would just be beginning. One of the reasons people stay poor is because they use their old money habits to handle new money problems.
#1: Low Financial IQ
Too much money is often as big a problem as not having enough money. As my rich dad said, “Money does not make you rich. Money has the power to make you both rich and poor.” There are billions of people each day who prove that fact. Most have some money, but they spend it only to get poorer or greater in debt. The problem again stems from people receiving money and then buying liabilities they think are assets.
#2: The Fear of Failure
In most cases, it’s the subconscious fear of failing that holds people back. It’s this fear of failing that teachers use to motivate people in school. I remember my teachers saying to me, “If you don’t get good grades, you won’t get a good job.” Later in life, when the A students who got the good jobs want to make career changes, their fear holds them prisoner.
#3: Not Knowing the Difference Between Good and Bad Debt
There’s a big difference between the good debt and the bad debt that is drowning most of America’s middle and lower class.
Good debt makes money for you. It’s the debt you use to invest in assets that pay for themselves. Bad debt takes money out of your pocket and is spent on things like clothes, electronics, a mortgage, or a car. The problem isn’t the debt; it’s the financial literacy to know the difference between good debt and bad debt.
Sometimes you’re dug so deep financially that expanding your means to match your debt level isn’t possible. For people in that unfortunate situation, a debt-reduction program is necessary, which means until they are debt-free, they must live within their means.
Now it’s time to make one of the most critical decisions in your life — will you take control of your finances or will you not.
If you take control of your finances, it will empower you to shape a new life for yourself. Getting financially healthy can seem like a huge undertaking, but the choice is a series of smaller decisions.
The decision to change your financial future is a mere preliminary. The decision to follow up, renewed each day you open your eyes, is the more critical choice.
Get a Grip on Your Spending Habits
- Get in the habit of paying with cash or a debit card. Keep a credit card for emergencies only!
- Learn to stop buying on impulse. Use your willpower to say no!
- Shop at wholesale clubs and discount department stores.
- Respect your budget! If you’ve reached the $200 food limit, skip the potato chips and ice cream.
- Buy generic medicine or find a discount pharmacy.
- Start looking for a part-time business or another way to earn a little more income.
- Turn your thermostat down. Turn off a few lights to save on your electric bill.
- Learn how to make your home as energy-efficient as possible.
- Check on your insurance policies. See if you can find some comparable policies for the same cost. Raise your deductible to lower your monthly bills.
In short, start getting in the habit of watching how you spend. Give yourself a week and just check on how much you can save by not buying the expensive shampoo or not going out to dinner. Let’s say you save $30 or $40 a week. Over a month, that comes to more than $100. Over a year, you’re saving $1,200 or more — and that’s a nice chunk of change to put towards paying off your credit cards.
Your goal should be to get out of bad debt as quickly as possible so you can start looking to a better future and thinking like the rich. Then you can start buying or building assets that will generate passive income to pay for your phone bills, electric bills, insurance policies, and more. That is the Rich Dad philosophy of expanding your means to live the lifestyle you choose.
Pay Yourself First
So many people get the wrong idea when they hear me say you should pay yourself first to get ahead financially. They usually think it means “treat yourself,” which is far from what I mean.
To get ahead financially, you have to invest in assets. But most people can’t go out right now and buy a cash-flowing asset. This is where the pay yourself first rules come into the picture.
With every single dollar that comes into your household, take 30% off the top. Whether the money comes from your paycheck, tax refund, or gift, follow this rule.
Then, take one-third and divide it up between three accounts: savings, investment, and charity. Your savings account becomes your rainy day fund. Your investment account will buy your assets, and your charity account will be your opportunity to give back (which is so important to Kim and me.)
How Kim and I Did This
Perhaps you’re thinking, “Sure, that sounds easy when you make as much as you do. But what about me? I’m living paycheck to paycheck!”
Fair enough, but you should know that Kim and I have been there and done that. When we were first married, we were very poor. I was $1 million in debt, and at times we lived in our car or on the couch of a kind friend. During that time, we were hustling day and night to build our business, and we hired a bookkeeper named Betty.
Betty was great because she organized our finances and kept us honest about our financial situation. But the one thing Betty and us disagreed on was the idea to pay yourself first. Each month we instructed her to take the 30% off the top and apply to our savings, investments, and charity — and each month she moaned about what a bad idea it was (mostly because the money wasn’t there for it).
Yet, each month, we made it happen and Betty dutifully fulfilled our directive. As entrepreneurs, we worked together to figure out new ways to make up the shortfall. We’d find side jobs, or create a new product. We’d hustle our way forward. And in the end, we paid ourselves and paid our creditors. Betty almost had a heart attack, but it all worked out!
You can do this.
The good news is you can do the same! Make this a habit. Once you embrace paying yourself first, you will be surprised at how fast the money will grow. Once you start investing in assets, that’s when the fun starts and you can use that income to purchase things like cars and vacations. But only once you’ve replaced your salary with investment income.
It would be great if everyone had a rich dad and grew up learning financial literacy. Most of you didn’t have such an advantage. Don’t let that discourage you. Regardless of what did or didn’t happen in the past, when you’re ready to make big changes, amazing things can happen in a short time. Many great fortunes have been built by determined people who started later in life, even people who were in considerable debt.
In my years of teaching, I’ve had the good fortune to meet and hear from tens of thousands of students who have taken the steps to get a financial education have turned their lives around.
No matter what stage of life a person is in, if they desire to change, change is possible.
Play it smart,
Editor, Rich Dad Poor Dad Daily